well the company performed. Wondering where to find all this great info? The SEC maintains an online database called EDGAR (the Electronic Data Gathering, Analysis, and Retrieval system) from which investors can access this and other information filed with the agency.
You can access EDGAR at the SEC website, www.sec.gov. From the home page, under Filings, click on the How to Search EDGAR link for the lowdown on how to use EDGAR.
The enforcement authority given by Congress allows the SEC to bring civil enforcement actions against individuals or companies alleged to have committed accounting fraud, provided false information, or engaged in insider trading or other violations of the securities law. The SEC also works with criminal law enforcement agencies to prosecute individuals and companies alike for offenses that include criminal violations.
The Sarbanes-Oxley Act of 2002 (SOX)
Beware, fraudulent companies: SOX may sound like a cuddly kitten, but it has claws! The bankruptcies of Enron Corporation and WorldCom, Inc. — and the subsequent billions of dollars of investor losses — prompted the U.S Congress to pass the Sarbanes-Oxley Act of 2002 (SOX) in an effort to renew investor confidence in the regulation of publicly traded companies. (SOX got its name because the legislation was sponsored by U.S. Senator Paul Sarbanes and U.S. Representative Michael G. Oxley.)
Abiding by SOX is mandatory for all publicly traded organizations regardless of size. SOX introduced major changes to the regulation of financial practice and corporate governance.
SOX is organized into 11 titles or sections. You can read all about them at www.sec.gov/about/laws/soa2002.pdf, but here is just a quick rundown:
Public Company Accounting Oversight Board (PCAOB): SOX formed PCAOB, which I discuss in the next section of this chapter. PCAOB is the watchdog of the accounting and auditing professions.
Auditor independence: The legislation establishes standards for external auditor independence in order to limit conflicts of interest.
Corporate responsibility: SOX lays out the responsibility senior executives take for the accuracy and completeness of corporate financial reports.
Enhanced financial disclosures: This part of the legislation requires enhanced reporting for financial transactions so users can make better-informed decisions.
Analyst conflicts of interest: This section addresses the code of conduct for security analysts and requires the analysts to disclose any conflicts of interest.
Commission resources and authority: SOX defines the SEC’s authority to censure or bar security professionals from practice.
Studies and reports: The SEC is required to perform studies on topics such as security violations and enforcement actions and report its findings.
Corporate and criminal fraud accountability: This section addresses criminal penalties for “cooking the books” and any other manipulation of financial records.
White-collar crime penalty enhancements: This section beefs up criminal penalties that can be assessed for white-collar crimes, including management’s failure to certify corporate financial reports.
Corporate tax returns: This title states that the Chief Executive Officer should sign the company’s tax returns.
Corporate fraud and accountability: SOX identifies corporate fraud and altering financial records as criminal offenses.
The Public Company Accounting Oversight Board (PCAOB)
SOX created the watchdog of the public company accounting and auditing profession: the PCAOB. The PCAOB is private, nonprofit corporation charged with bringing a halt to the financial shenanigans on the part of corporate chief financial officers (CFOs) and chief executive officers (CEOs) for publicly traded companies. Public accountants — those doing work for companies other than their own employer — support this goal through the preparation of informative, fair, and independent financial statement (audit) reports.
The PCAOB consists of five members, including a chairman appointed by the SEC and two members who must be — or previously have been — certified public accountants (CPAs). The chairman must be one of the two CPA members, but she cannot be an active CPA; in fact, she cannot have been a practicing CPA for at least five years prior to being appointed to the position. Being a member is a full-time, five-year commitment.
Getting to Know the Financial Accounting Standards Board (FASB)
Resulting from some congressional criticism of the standard-setting work being done by the American Institute of Certified Public Accountants (AICPA), the Financial Accounting Foundation (FAF) was established in the state of Delaware as a nonprofit corporation by accountant Teresa S. Polley in June 1972.
The FAF in turn established the Financial Accounting Standards Board (FASB), which is currently the private-sector body establishing generally accepted accounting principles (GAAP) for all nongovernmental entities. (Governmental entities follow procedures set up by the Governmental Accounting Standards Board or GASB; see Chapter 6 for more information.)
The FASB has seven full-time members, who are selected by FAF. All are required to have knowledge of accounting, finance, and business. For more info about the FASB, accounting standards, and FAF, check out the FASB website at www.fasb.org.
AICPA: SEC AND PCAOB WORKING TOGETHER
Most years, SEC and PCAOB representatives get together for a chit-chat about various financial accounting issues. The 2019 conference held in January 2020 addressed various SEC, accounting, and auditing
